Last week Gov. Bill Haslam announced that he would not accept federal money to expand Medicaid, but he added a big qualifier. He'll take those federal funds, all right, but only if he can work out a deal with the Department of Health and Human Services that would allow Tennessee to use the money to buy private insurance for those who can't afford it (most likely from the forthcoming federal health-insurance exchanges).

"There are a lot of federal requirements that come with Medicaid that make it difficult to provide quality care in the most cost-effective way possible. Instead of insuring more people through an inherently flawed system, we'd hoped to purchase private insurance to insure as many as 175,000 more Tennesseans," Haslam said in speech during a rare joint session of the General Assembly.

The details of this plan were vague and extremely broad because they hinge on making a deal with HHS. In addition to the main idea of purchasing private health insurance with federal Medicaid expansion funds, Haslam's plan would reform the way doctors are paid, allow those who can afford it to contribute copays, and to make the deal renewable only through the state Legislature.

In past months, Haslam said he'd have to do a lot of research before agreeing to accept federal funds allocated for Medicaid expansion. His press secretary, Dave Smith, says the Tennessee plan is based on the plan that Arkansas Gov. Mike Beebe officially proposed on Feb. 26 (his was the first state to strike a public deal on Medicaid with HHS). Haslam has also had "extensive" conversations with officials at HHS and the Centers for Medicare and Medicaid Services (CMS), Smith says, about whether his approach to expanding TennCare would be allowed.

Still, there will be no budget amendment authorizing any sort of TennCare expansion until HHS gives the go-ahead. Haslam said Tuesday that he wasn't sure if he and HHS "can work this out in a day, a month, or a year." He added that he wants the details ironed out before taking any further steps.

Reactions immediately following this announcement were unsurprising. The Tennessee GOP hailed Haslam's leadership and his refusal to accept funds to expand TennCare. The state Democratic Party called it a denial of health care for 300,000 people and thousands of jobs. House Democratic Caucus Chairman Mike Turner called Haslam's announced plan "a failure of our moral obligation to protect the health and welfare of the most vulnerable among us."

Advocacy groups, for the most part, were also let down by the announcement. Several groups, like AARP Tennessee, had hoped Haslam would buck the party line and agree to expand TennCare.

"We were obviously really disappointed [about the announcement]," says Shelley Courington, the advocacy director for AARP Tennessee. And the group is still in a tough position since they have no way of knowing what will happen without HHS' blessing. Courington says that unless the federal department agrees to Haslam's plan by this week, thousands will have to wait even longer for access to health insurance.

Though this "third option" isn't what AARP was hoping for, Courington says the organization has committed to offering contacts who could help the governor fine-tune a plan that would effectively serve people who need health insurance.

"We appreciate [Haslam's] thoughtful consideration of the issue," Courington says. "We're hopeful that he left the door open [to compromise]."

But Brad Palmertree, the interim executive director of the Tennessee Health Care Campaign, worries that, while the plan is a politically feasible compromise for Haslam at the moment, he could face some great obstacles if he has to call a special session later this year to approve the budget accommodations that would come with a plan like the one he is proposing.

"A simple budget amendment this year was the clearest, easiest way to get legislative approval. No legislator wants to come back to Nashville later this year for a special session to cast a vote for [or] against Obamacare. With next year being an election year, it may be even trickier," Palmertree says.

But political obstacles are not the only ones the "third option" Tennessee plan will have to overcome.

While Beebe's Arkansas plan was approved by HHS, it was only in broad terms. Medicaid has been managed through private companies for years, and HHS encourages that. But Medicaid has strict rules about payment and services, as some states have found in trying to make their programs more sustainable. As Indiana discovered while creating its state Medicaid program, copays are a contentious issue. That state allows single adults on Medicaid to pay an emergency room copay of $25. But Medicaid rules dictate that parents of children on Medicaid can only pay $2-$5 for an ER visit. One of the main points of Haslam's Tennessee plan would allow people who can afford it to contribute copays.

The copay issue is just one component that could be tricky for the Tennessee plan, Palmertree says.

"First, Gov. Haslam wants to ensure that some in the expansion population—possibly those between 100-138 percent [of the federal poverty level]—have cost-sharing (co-pays, etc) whereas this would not be the case in Medicaid. I don't believe that is even allowable under existing Medicaid statute and rules," Palmertree says. "Second, because of the higher provider reimbursements and higher administrative costs, private insurance always costs more. So it's doubtful that the governor's plan would be able to cover the same number of people with the same amount of money because of the higher costs associated with providing private insurance to low-income individuals."

Another flaw in this "third option?" Private insurance copays will continue to be a barrier for some people.

"[Low-income patients] will continue to address needs in the emergency room rather than a primary care physician," Palmertree predicts.

But the Tennessee Hospital Association is pretty optimistic about Haslam's plan. THA president Craig Becker says allowing copays will prevent the expanded TennCare program from being abused, and won't actually lead people to use the ER for routine care.

"That's part of the deal—that we'd be able to charge people [with insurance]" for a visit to the ER, he says.

The THA is especially pleased with the proposal for using commercial insurance plans in the expansion, which pay hospitals much more than Medicaid does.

Though Becker's group ultimately sees the economic advantage of this "third option" plan, he also says it would benefit the people who use it.

"People who have insurance are healthier. They tend to get their care a lot sooner," he says. "We're trying to change people's habits."

The governor told reporters Tuesday that he'd spoken with HHS secretary Kathleen Sebelius over the weekend, who told him she was willing to work out a deal to make the Tennessee plan happen.

"Now, they've said copays at a certain level, we're fine with—above 100 percent [federal poverty level].They said [they'd] be interested in talking about emergency room visists that aren't true emergencies at different levels," Haslam said, which would incentivize primary care doctors over ER visits. "If you do have coverage, then there should be some penalty when you go to the emergency room when you have other providers you can go to. There should be some incentive not to use the more costly form."

But unless Haslam, HHS, and CMS can work out a deal to move forward with this plan in the very near future, it seems unlikely that any expansion will take effect by 2014. The federal government's health insurance exchange marketplaces, though, will be open for business in October.